FOREX-Yen close to 2-week lows on rate concerns, market sentiment in focus

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By Stefano Rebaudo and Tom Westbrook

Feb 25 (Reuters) - The yen hovered near two‑week lows against the dollar on Wednesday after sliding the previous day on worries about a more dovish Bank of Japan and rising tensions with China, while investors focused on broader risk sentiment.

Japan's currency weakened on Tuesday after a report that Prime Minister Sanae Takaichi told the BOJ she had reservations about more interest rate hikes and in reaction to China putting more Japanese firms on an export control list in retaliation for Takaichi’s comments about Taiwan.

Following Takaichi's landslide election win on February 8 the yen strengthened as markets bet that a government favouring fiscal stimulus would tilt the balance of risks towards additional monetary tightening.

The yen JPY=EBS hovered around 156 against the dollar and was last at 156.10.

Japan's government on Wednesday nominated two academics viewed as strong stimulus advocates to the central bank's board, a move that could push the BOJ in an even more dovish direction, although Derek Halpenny, head of research global markets at MUFG, voiced some uncertainty on that point.

"We can’t be sure this will change the policy board dramatically especially given the two departing members were on the dovish side," he said.

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"If the U.S. dollar were to fall alongside high‑beta forex, it would be a concerning signal that markets are developing broader, U.S.‑specific worries linked to AI revaluations," said Francesco Pesole forex strategist at ING.

"We sense that this is less likely, and that the dollar will instead continue to respect its somewhat reduced, but still negative, correlation with U.S. equities," he added.

The U.S. dollar index =USD was down 0.10% at 97.78.

U.S. President Donald Trump said little to allay concerns about the future of his tariffs and global trade policy in his State of the Union speech on Tuesday.

The Australian dollar AUD= rose 0.55% to $0.7097 after a pickup in inflation raised the risk of rate hikes.

The Aussie is a so-called high-beta currency with a strong and persistent correlation with global risk assets, especially equities, and it remains the most vulnerable to stock market turmoil being in a particularly stretched overbought position.

The euro was up 0.15% against the dollar at $1.1792.

The yuan, which has gained nearly 7% in 10 months, hit 6.8766 to the dollar on Tuesday, its highest in almost three years, and held at 6.8778 in offshore trade CNH=.

"The fundamental underpinnings for our CNY appreciation view - a starting point of deep currency undervaluation and the remarkable strength of the export sector - remain very much in place," said analysts at Goldman Sachs.

"While uncertainties remain, we believe the likelihood of President Trump imposing additional Section 301 tariffs on Chinese products is low ahead of his planned visit to China at the end of March."

The New Zealand dollar NZD= inched higher to $0.5983, while China's yuan CNY= extended Tuesday's sharp gains to touch an almost three-year peak of 6.8703.

China is closely monitoring U.S. policies and says it will decide "in due course" whether to adjust countermeasures to U.S. tariffs.

(Reporting by Stefano Rebaudo and Tom Westbrook; Editing by Edwina Gibbs, Christian Schmollinger and Hugh Lawson)

((stefano.rebaudo@tr.com))